Transfer to a Roth IRA while doing a SEPP?
L1: Transfer to a Roth IRA while doing a SEPP?
I’m age 57 and 18 months into my Fixed Amortization SEPP. Is there a way to roll over a small portion of my IRA balance to a Roth IRA each year to capitalize on the new lower income tax rates for as long as they may last? Note: When calculating my SEPP distribution, I used 100% of my IRA balance for the SEPP distribution calculation.
2018-12-17 14:25, By: Dee, IP: [2600:8803:7b00:b00:2df8:889b:a07:7d99]
L2: Transfer to a Roth IRA while doing a SEPP?
IRS Reg 1.408A-4, QA 12 addresses a Roth conversion in an active SEPP. However, this Reg assumes a full conversion, not a partial. Therefore, considering that partial transfers have caused issues with the IRS in the past, there is some risk doing a partial Roth conversion. In addition, the IRS Reg clearly states that the conversion distribution (shown on 1099R) is NOT counted as part of the SEPP distribution, the IRS sees no few of these that the 1099R exceeding the SEPP amount is very likely to invite an inquiry.
After converting x% of your TIRA balance to a Roth, the TIRA and Roth IRA would both be part of your SEPP plan, giving you a choice of which type of IRA you would tap to continue to distribute your SEPP amount. These accounts are taxed differently, so you would need Form 8606 to report a Roth distribution. Roth distributions of regular and conversion contributions are tax and penalty free, with the SEPP penalty exception erasing the conversion 5 year holding period to avoid penalty.
In the year you actually convert however, your taxable income would be increased by your conversion amount plus your usual SEPP distribution. Your tax bill would increase and the taxes would be part of your expenses paid from your SEPP Distribution.
In summary, there is some risk and a lot of moving parts to this strategy. This should be factored into your decision.
2018-12-17 18:46, By: Alan S, IP: [126.96.36.199]
L3: Transfer to a Roth IRA while doing a SEPP?
Thanks for the research finding IRS Reg 1.408A-4. My plan is to convert an amount to keep me in the 12% income tax bracket (i.e. just under the 22% bracket amount) as I expect congress to increase tax rates at some point in the future after my SEPP has concluded. After reading IRS Reg 1.408A-4, QA 12 in conjunction with Rev Rul 2002-62 Section 2.02 para e, (Changes to account balances), it seems I could establish a new Roth IRA account that would accept these yearly conversions. And to keep it simple, I would just continue my fixed monthly SEPP distribution amount from the TIRA and leave the newly established Roth IRA account untouched until the SEPP and 5-yr conversion holding period has concluded. I would also pay the conversion taxes “out of pocket” so as not to affect the balances (other than gains or losses) of the TIRA and the Roth IRA.
2018-12-17 20:16, By: Dee, IP: [2600:8803:7b00:b00:2df8:889b:a07:7d99]